The problem that Pandora faces is as Westergreen stated, how to get, “…the customers to leave a buck in the tip jar”. How can we monetize this service to the fullest extent without jeopardizing customer service? Basically, what is the connection of what users want and what they will pay?
With pressure from investors to make Pandora profitable the CEO needed to figure out how to keep its regular customers, attract new ones while at the same time keep costs under control and below revenue. There was pressure to bring Pandora to profitability. Licensing fees was an increasing expense. Unless Pandora could convince the customer to pay for the music service, it would be an unattractive company for the support of their Venture capital partners. Pandora has yet to make a profit.
Pandora should focus on the cost-benefit analysis in order to make a rational decision.
The following points must be considered:
· How can the usage of service be traced?
· What are the exact benefits in terms of dollar amount of changing the subscription model?
· What are the effects of adding more advertising? What are the costs?
Pandora can do one of three things:
· Add more advertising.
· A new “freemium” model.
· A subscription model for all the users.
The alternatives mentioned about have serious impacts on the ability to increase revenue for Pandora.
The first option of adding more advertisements during the music would add up more revenues. Based on the basic information, Pandora can make better use of its model by targeting particular ads or providing local marketing.
The second alternative is to implement “freemium” model that could provide a limited but free service to all the users and also offer a premium-priced value-added membership for the “super-users”.
The last option with Pandora was to implement a subscription model for all the users. This would help to take advantage of economies of scale by spreading the costs among large customer base.
After the evaluation of alternatives for the pros and cons, I would suggest to have a subscription pan to all the users. This would cover the operating and maintenance costs and also enable to improve the revenue generating ability for Pandora. Give each segment a piece of the pie and use different methods of generating income. The free service gets heavy ads while the paid service gets none or very little. This would also allow for better targeting for local advertising. The more people who use it the more people in a small area will have access to the ads which means they can charge more.